Can a Car Finance Company Sue You?

Car finance companies enable individuals to purchase vehicles through contractual agreements for repayment. Both parties must uphold specific terms. If a borrower fails to meet obligations, the finance company can pursue legal action, leading to serious financial and legal consequences.

Understanding When a Lawsuit May Occur

A primary reason a car finance company might pursue legal action against a borrower is due to a default on the loan payments. Default generally occurs when a borrower consistently fails to make scheduled payments, typically after a period ranging from 30 to 90 days past the due date. When a loan enters default, the finance company has the right to repossess the vehicle, as the car serves as collateral for the secured loan. This repossession allows the lender to recover some of their losses by selling the vehicle.

Following repossession, the finance company usually sells the vehicle, often at auction. Proceeds are applied to the outstanding loan balance. However, due to depreciation and auction sales, the amount received often does not cover the entire remaining debt, including repossession, storage, and sale costs. The difference between the total owed (loan balance plus fees) and the amount recovered is a “deficiency balance.” For example, if a borrower owed $12,000 and the repossessed car sold for $3,500 with $150 in fees, the deficiency balance would be $8,650.

The borrower remains responsible for this deficiency balance. If unpaid, the car finance company may sue to recover the funds. This lawsuit for a deficiency balance is a common scenario.

The Legal Proceedings

If a car finance company sues a borrower for a deficiency balance, the legal process typically begins with filing a formal complaint with the appropriate court. This document outlines the finance company’s claims, specifying the debt owed, and names the borrower as the defendant. After filing, the borrower must be formally notified of the lawsuit through “service,” usually involving a process server or sheriff delivering a summons and a copy of the complaint.

The summons notifies the borrower of the lawsuit and specifies a deadline to file a formal response, called an “answer,” with the court. This response period typically ranges from 20 to 30 days from the date of service. Failing to file an answer within the stipulated timeframe can result in a “default judgment” against the borrower, meaning the finance company automatically wins.

These cases are generally heard in civil court, or small claims court if the amount falls within its jurisdictional limits. Once an answer is filed, the case may proceed through discovery, where parties exchange information and evidence, and potentially to settlement conferences or motions for summary judgment. If no settlement is reached and summary judgment is not granted, the case may proceed to trial, where a judge or jury will hear evidence and make a decision.

Possible Repercussions

If a car finance company obtains a judgment, it gains legal authority to pursue various collection methods. A judgment is a court order declaring the borrower legally owes money to the finance company. This judgment significantly impacts the borrower’s financial standing and can remain on public records. While the judgment itself may not appear on credit reports after 2017, the underlying defaulted debt and collection activities will negatively impact the credit score.

One common post-judgment collection method is wage garnishment, where a portion of the borrower’s earnings is withheld by their employer and sent to the finance company. Federal law limits garnishment from disposable earnings to the lesser of 25% of disposable income or the amount exceeding 30 times the federal minimum wage. These limits ensure a debtor retains sufficient income for basic living expenses.

Another method is a bank account levy, which allows the finance company to freeze and seize funds from the borrower’s bank accounts. A bank levy typically requires a court order and can freeze funds up to the debt amount, including any accrued penalties and interest. Funds may be held before being transferred to the creditor.

A judgment lien can also be placed on other property, such as real estate or vehicles. This lien acts as a claim against the property, meaning if the property is sold or refinanced, the judgment must typically be satisfied from the proceeds. While a judgment lien does not automatically force the sale of property, it can prevent the borrower from selling or transferring the property with a clear title until the debt is paid. These collection actions underscore the serious financial consequences of a judgment.